Residential Real Estate Brokerage as a Principal-Agent Problem

Paul Anglin and Richard Arnott

The Journal of Real Estate Finance and Economics, 1991, vol. 4, issue 2, 99-125

Abstract: The authors analyze the terms of the brokerage contract between a house seller and his agent, using the established literature on the principal-agent problem. Considering the influence of moral hazard and adverse selection, they predict a number of features of the contract. Many of these features are not present in observed contracts. To account for this discrepancy, they discuss certain aspects of the real estate market which are not included in the standard principal-agent model but may explain the difference. Standard principal-agent theory neglects important contract design considerations, namely robustness and costs of complexity. In general, the commission contract performs poorly by failing to allocate risk efficiently or to provide agent incentives. It favors established agents and precludes contractual diversity. Finally, they contrast the brokerage contract for real estate with the dealership contract for used cars, but find no compelling answer as to why there are few used house dealers. Copyright 1991 by Kluwer Academic Publishers

Date: 1991
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